Regis Corporation — Form 10-Q Summary
Business context and reporting period
Regis Corporation owns, operates and franchises beauty salons. The filing covers the first quarter of fiscal 2016, the three months ended September 30, 2015, with comparative results for the three months ended September 30, 2014. Regis reported 9,357 system-wide salons, 9,564 worldwide locations including non-controlling interests, and approximately 48,000 corporate employees.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $450.1 million | $464.6 million |
| Operating income (loss) | $4.3 million | $(0.8) million |
| Operating margin | approximately 1.0% | approximately (0.2)% |
| Net loss | $(0.8) million | $(9.8) million |
| Net loss per share | $(0.02) | $(0.18) |
| Cash flow from operations | $11.9 million | $16.0 million |
| Capital expenditures | $8.6 million | $11.6 million |
| Cash and equivalents at period-end | $176.8 million | $186.3 million |
Revenue comprised service revenue of $350.2 million, product revenue of $88.0 million, and royalties and fees of $12.0 million. Consolidated same-store sales increased 0.7%, while total revenue declined 3.1% because of salon closures, company-owned salons sold to franchisees, and foreign currency effects. Service revenue declined $14.6 million year over year.
North American Value generated $349.0 million of revenue and $30.5 million of operating income. North American Premium generated $73.2 million of revenue and a $2.4 million operating loss. International generated $28.0 million of revenue and $0.1 million of operating income.
At September 30, 2015, total debt was $120.0 million, consisting of senior term notes. The company had no borrowings under its $400.0 million revolving credit facility, $2.1 million of standby letters of credit, and $397.9 million of unused availability. Debt represented 17.1% of capitalization, compared with 16.1% at June 30, 2015. Management stated that available cash, operating cash flow and borrowing capacity should be sufficient for the next twelve months, although cash generation could vary.
Material changes versus the prior comparable period
- Operating results improved from a $0.8 million operating loss to $4.3 million of operating income, primarily from lower operating expenses, reduced depreciation and amortization, and lower interest expense.
- Net loss narrowed to $0.8 million from $9.8 million, although the tax expense of $2.8 million produced an unusually high 98.3% effective tax rate.
- Operating cash flow declined $4.2 million, primarily because of a larger inventory build.
- The company repurchased 3.4 million shares for $43.7 million, reducing cash and shareholders’ equity. Approximately $67.3 million remained available under the repurchase authorization.
- Cost of service increased to 62.2% of service revenue from 61.3%, driven by minimum wage increases, stylist productivity and higher health insurance costs. Cost of product improved to 48.9% of product revenue from 50.7%.
- North American Value same-store sales increased 1.5%, while North American Premium declined 2.6% and International increased 0.1%.
- The September 30, 2014 comparative financial statements were revised for deferred-rent and self-insurance accounting items. The revision increased the prior-year quarterly net loss by $0.8 million to $9.8 million and did not affect operating cash flow or cash balances.
Outlook, commentary, risks and unusual items
Management emphasized investments in people, training, technology and guest experience. No specific revenue, earnings or same-store sales guidance was provided. Management expects approximately $8.0 million of fiscal-year tax expense related primarily to non-cash tax effects from valuation allowances, with quarterly effective tax rates subject to significant fluctuation.
- The company recorded $2.7 million of salon long-lived asset impairment charges, compared with $4.1 million in the prior-year quarter.
- Regis recognized a $0.9 million equity loss from Empire Education Group, compared with $0.4 million of equity income previously. The filing warns that additional non-cash impairment of this investment could be material.
- U.S. federal tax returns for fiscal years 2010 through 2014 are under IRS audit. Proposed adjustments exist for fiscal years 2010 and 2011, which Regis intends to contest.
- The company faces ordinary-course litigation, including purported consumer and wage-and-hour class claims. Outcomes are uncertain and could materially affect a particular period.
- Disclosure controls remained ineffective because a previously reported material weakness in lease accounting had not been fully remediated. Further material misstatements in deferred rent and related accounts remain possible.
- Key operating risks include salon closures, labor and minimum-wage costs, stylist recruitment and retention, competition, franchisee performance, foreign currency, tax matters, cybersecurity, economic conditions and execution of cost-reduction initiatives.
Investor verification points
- Verify the sustainability of positive operating income despite declining total revenue and negative North American Premium results.
- Assess whether inventory growth, working-capital needs and share repurchases could pressure cash balances.
- Review the lease-accounting remediation plan and subsequent filings for resolution of the material weakness and any further revisions.
- Monitor IRS audits, tax valuation allowances and the unusually high effective tax rate.
- Evaluate impairment risk for goodwill, salon assets and the Empire Education Group investment.
- Confirm the timing and terms of the $120.0 million senior term notes and compliance with related covenants.